Remove the first forward slash of your upload directory in the Settings > Miscellaneous section. Its works. Never do CHMOD 777. That is not an answer for a production website.
I resolved this by playing with the upload paths in:
General > Settings > Miscellaneous
Simply deleting the existing path and pasting the FULL path of my image uploading folder fixed the issue for me. No CHMOD 777 crap – thats dangerous btw folks.
peace out
j
